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Euro Euphoria Fueled By ECB, Sterling To Face BoE Inflation Report

Euro Euphoria Fueled By ECB, Sterling To Face BoE Inflation Report

David Song, Strategist

Talking Points

  • Euro: ECB Talks Up Bond Purchases, Italy Contracts For Four Straight Quarters
  • British Pound: Range in Focus as BoE Inflation Report Takes Center Stage
  • U.S. Dollar: Index Breaks Upward Trend, Fed Chairman Bernanke On Tap

Euro: ECB Talks Up Bond Purchases, Italy Contracts For Four Straight Quarters

The Euro climbed to a high of 1.2334 as European Central Bank board member Ardo Hansson talked up speculation for additional asset purchases during an interview with the Wall Street Journal, and it seems as though the Governing Council is preparing to reestablish its Securities Markets Program at the next policy meeting on September 6 in an effort to stem the heightening threat for contagion. However, the ECB has come under increased criticism as the central bank risks its independence, and we may see a growing rift within the committee as Bundesbank President Jens Weidmann continues to voice his opposition against the non-standard measure.

Meanwhile, economic activity in Italy contracted for the fourth straight quarter during the three-months through June to mark the longest stretch of declines since 2009, and we anticipate to see the ECB implement a range of tools over the coming months as the fundamental outlook for the region turns increasing bleak. Nevertheless, as the relative strength index on the EURUSD breaks out of the downward trend carried over from earlier this year, the relief rally in the single currency looks poised to gather pace in the days ahead, and we may see the pair make a run at the June high (1.2746) as it continues to hold above the 50-Day SMA (1.2403). However, on a longer-term scale, we’re still watching thebearish trend carried over from 2011, and a failed run at the June’s high would continue to favor a bearish outlook for the pair as it would mark a lower high.

British Pound: Range in Focus as BoE Inflation Report Takes Center Stage

The British Pound pared the decline from the previous day and advanced to a high of 1.5675 to maintain the range-bounce price action carried over from June, but the Bank of England inflation report on tap for tomorrow may instill a bearish outlook for the GBPUSD as market participants expect the central bank to lower its forecast for growth and inflation. According to a survey by Bloomberg News survey, an overwhelming majority of the 16 economists polled see the BoE cutting its fundamental assessment for the U.K. as the region faces a deepening recession, and we may see Governor Mervyn King show a greater willingness to expand the balance sheet further as the central bank sees a renewed risk of undershooting the 2% target for inflation. However, as the Funding for Lending program gets underway, Mr. King may continue to endorse a wait-and-see approach over the near-term, and the developments coming out of the quarter report should dictate price action for the remainder of the week as currency traders weigh the prospects for future policy.

U.S. Dollar: Index Breaks Upward Trend, Fed Chairman Bernanke On Tap

The greenback remains under pressure on Tuesday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,981, and the reserve currency may weaken further during the North American trade as FX traders increase their appetite for risk. Although Fed Chairman Ben Bernanke is scheduled to speak later today, the central bank head may give little direction for monetary policy, but dovish comments crossing the wires could spark a bearish reaction in the greenback as market participants still see scope for another large-scale asset purchase program. In turn, we may see USDOLLAR make fresh monthly lows in the coming days, and the technical outlook for the reserve currency is turning increasingly bearish as the index breaks out of the upward trend from earlier this year.

--- Written by David Song, Currency Analyst

To contact David, e-mail Follow me on Twitter at @DavidJSong

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